Types of Risk

Abstract

A chance of a bad event is one type of risk. The volatility of an act’s possible outcomes is another type of risk. Distinguishing these two types of risk is normatively significant because different general principles of rationality govern attitudes to them. A measure of the risk of a bad event may use the probability-utility product for the event. A measure of the volatility of an act’s possible outcomes may, in some cases, use the variance of the probability distribution of the utilities of the act’s possible outcomes. Given that an act’s risk belongs to every possible outcome, it arises from an equilibrium between the risk’s effect on an outcome’s utility and the utilities of outcomes’ effect on the risk.